2/26/2009 @ 8:10AM

Taxpayer Heroine

Nina Olson heads the Taxpayer Advocate Service, an independent division within the IRS that is supposed to help taxpayers resolve complaints with the agency when those problems can’t be dealt with satisfactorily through normal channels. Each year the Advocate must report on problem areas within the IRS that are in need of improvement. This year’s submission–unusually blunt for a government agency–is a taxpayer’s delight: “The most serious problem facing taxpayers is the complexity of the Internal Revenue Code. The only meaningful way to reduce these burdens [of compliance] is to simplify the tax code enormously.”

Olson didn’t go so far as to advocate a flat tax, but anyone who looks at the report can only conclude that we must start over again. As the report states: “Taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them either to overpay their tax or to become subject to IRS enforcement action for mistaken underpayment of tax. [However,] sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities.” The Advocate goes on, chronicling the grim realities:

–Individuals and businesses spend 7.6 billion hours a year filling out tax forms for the IRS. “And that figure does not even include the millions of additional hours that taxpayers must spend when they are required to respond to an IRS notice or an audit.” Those 7.6 billion hours consume the equivalent of 3.8 million full-time workers.

–The cost of complying with the code comes to $193 billion. Other experts think that assessment is too low and have come up with estimates approaching $300 billion.

–The number of words in the code has grown by 2.3 million since 2001. In 2008 there were more than 500 changes to the tax code. Other surveys have found that the code has been amended some 14,000 times since the mid-1980s.

–No one can cope anymore: “Individual taxpayers find the return preparation process so overwhelming that more than 80% pay transaction fees to help them file their returns.”

There are countless examples of the code’s mind-numbing complexity. For instance, there are at least 11 incentives to encourage taxpayers to save for and spend on education, with each having different particulars on definitions, eligibility requirements, income-level thresholds, phase-out range and inflation adjustments.

There are at least 16 incentives to encourage saving for retirement, again with different parameters.

The alternative minimum tax is an atrocity in a class all its own. It was enacted four decades ago to ensure that everyone pays income taxes, no matter what loopholes or deductions they might employ. In 1970 only 20,000 filers were affected. By 2010 the number will reach 33 million. Congress, knowing the outcry that would ensue if it whacked the middle class that harshly, regularly enacts a so-called patch, which results in the AMT hitting around 4 million filers. The biggest trip wires for AMT are family size and living in a high-tax state. In other words, if you have a lot of kids or you reside in California, New York or a similarly tax-greedy state, you will fall into AMT quicksand. Writes Olson: “Few people think of having children or living in a high-tax state as a tax avoidance maneuver, but under the unique logic of the AMT, that is how those actions are treated.” Olson wants Congress to get rid of the AMT once and for all.

And God help us if Congress again tries to help beleaguered taxpayers. A little more than a year ago, for instance, Congress–with considerable fanfare–enacted the Mortgage Forgiveness Debt Relief Act. Previously, a distressed homeowner who renegotiated his mortgage with his bank had to pay income tax on the amount by which the loan was reduced. This new law was supposed to put a stop to that. But, as the Advocate’s report notes, “A taxpayer must file Form 982, [which] is extremely complex, and very few taxpayers or preparers are familiar with it âÃ‚Â€¦ and the form is not included in many tax software packages.”

One sees a similar abomination with the Earned Income Tax Credit, which is supposed to give low-income taxpayers a rebate. Naturally, “The eligibility requirements and computations are complex, yet recipients are relatively less able to understand complex rules and less likely to speak English as their primary language, creating a recipe for confusion.” The result: a large number of improper claims by taxpayers and improper denials by a confused IRS.

And on it goes.

Our frustrated National Taxpayer Advocate recommends: “The tax laws should be simple enough so that most taxpayers can prepare their own returns without professional help, simple enough so that taxpayers can compute their tax liabilities on a single form, and simple enough so that IRS telephone assistors can fully and accurately answer taxpayers’ questions. âÃ‚Â€¦ The tax system should incorporate a periodic review of the tax code–in short, a sanity check.”

President Obama could steal the tax issue once and for all from the GOP if he took up the flat tax. Such a radical reform would rocket our economy out of recession and onto an awe-inspiring growth trajectory. But this is one rendezvous with destiny that our new Chief Executive will likely miss. Too bad for him and, more important, for us and for the world.